Realogy, Trulia, Rumors, Black Swans: Weaving the Tapestry

A couple of days ago, there was a rumor floating around Wall Street that Realogy would acquire Trulia. Both Trulia and Realogy threw cold water on that dream quickly. Nonetheless, I found the whole thing fascinating, since a similar scenario was exactly a “Black Swan” event I used to amuse the audience at the last T3 Summit. Here’s the video, courtesy of Stefan Swanepoel and T3:

Black Swan #2 was that Realogy would acquire Zillow. Heh.

Do I still think Realogy would acquire a major portal? Not really. I never thought it in the first place, but brought it up so as to get the people at T3 thinking in a different way.

But the whole brief chatter got me thinking further, and I draw together various separate strands to make the claim that one day in the not-too-distant future, we could (not that we will, but that we could) see a major acquisition of a major “portal” (in quotes for a reason).

Strategic Fit

I still maintain that the Realogy Value Circle is a key model of modern brokerage.

In fact, almost every brokerage above boutique size in real estate has some sort of mortgage and title/settlement operation as an affiliated business line. And I still maintain that in 2013, massive online lead generation is a missing piece of the value circle.

Today, Realogy fills that missing gap with enterprise-level relationships with major portals, like Zillow, Trulia, and Realtor.com. But in my view, it’s easy to see how something like Online Portal would fit between Franchising and Relocation.

Think of it slightly differently. Coldwell Banker — a unit of the Realogy Franchise Group — spends millions each year on its website: coldwellbanker.com. Let’s just imagine that somehow, CB’s corporate website generated 40 million monthly uniques, with one of the top five mobile apps, putting it in the same class as the Big Three.

Is there really much doubt that CB and its franchisee brokers would have a significant advantage in the key game of Recruiting and Retention? Is it really that hard to imagine that CB agents would have an undeniable advantage when sitting at the kitchen table with sellers, if CB had the #2 website in real estate?

Of course not. And having that massive online portal affects other parts of the value chain. It’s easier to sell franchises if your brand website is the #2 website in real estate. It’s easier to have a significant mortgage operation if you’ve got 40 million unique visitors. And so on and so forth.

Financial Notes

As much as the “strategic fit” makes sense, one major stumbling block is that if Realogy were to acquire a portal, all of the competing brokers would pull their data, and stop subscribing. More on that below. But hold that thought and consider this.

In Q3/2013, Trulia as a whole had revenues of $40.3m, but the core Marketplace revenues — which is the subscriptions from brokers and agents — was but $24.8m of that total. The growth rate is impressive, and it’s a really strong, nice business. The monthly ARPU (Average Revenue Per User) was $186 with strong growth, so over the three months, let’s call that $558 per subscriber.

In Q3/2013, Realogy’s Cartus unit — its relocation business — did revenues of $127m with basically flat growth, based on 28,406 Broker Referrals. That works out to $4,470 per Broker Referral, or about 8X the quarterly ARPU for Trulia.

The point I made at T3 was that an online portal under the auspices of a company like Realogy does not need to be bound to the monthly subscription model. It can, instead, take on the referral percentage model of the relocation businesses. The numbers make clear just how much more revenue per “user” there is under the relocation model.

And fact is, the second largest real estate portal in the US is still but one-fifth the size of just one relocation unit of one company in terms of revenues. (And that’s before we start yapping about profits, since Trulia had $4.8m in EBITDA in Q3 while Cartus put $45m into Realogy — almost 10x.)

Another subtle advantage of the referral model vs. the subscription model is that the former comes only when the broker/agent had closed a transaction: it’s a variable cost. The latter is a fixed cost, and brokers/agents have to pay it whether they’re selling houses or not. Quite a lot of brokers/agents are willing to pay referrals once they have a check in hand than they are to pay out of pocket.

But What About the Data?

Realogy executives themselves were the first to suggest that Realogy would never buy Trulia, since other brokers would just pull their listings. Yeah… not really. Again, I’m not suggesting that Realogy would buy Trulia. I am suggesting that this “others will pull their data” is a red herring.

Because of IDX, VOW and market power.

The whole point of IDX is to allow brokers to show each others’ listings on their own websites/mobile apps. A portal owned by a company like Realogy would have brokerage licenses and MLS participants in every single MLS in the country. Sure, they’d have to abide by IDX rules, but if the point is to do online lead generation, and then funnel them through the relocation model, the difference is minimal. There are already companies doing this exact thing, including the referral model.

A MLS participant is not subject to the same rules/licenses because they don’t go by the syndication ruleset, but by the MLS/IDX ruleset. Oh and the MLS ruleset can’t be too restrictive since that was the whole point of the NAR-DOJ Settlement. If a broker can print it out and show it to a client in his office, then he has to be able to show it on the VOW, which requires mere website registration in most states.

Plus, we’re not talking about some paper brokerage here with no listings of their own. We’re talking about major brokerages with significant listings of their own. Theoretically, competitors could “pull” their listings by opting out of IDX. But that means they can’t use the listings of Realogy brokerages on their own marketing platforms. Plus, IDX is an all-or-nothing deal, so they can’t just opt out of IDX with Realogy alone; they opt out of IDX with everybody else as well.

Which means no one would actually opt out or pull their listings from anybody. Any sort of rules/regulations trying to deal with the “new business models” of so-called paper brokerages simply do not apply when we’re talking about the Realogys of the world.

The Listing Agent and the Three Headed Monster

And lest we forget, a Realogy-owned portal would obviously get rid of the “three-headed monster” problem immediately. Leads from the listing would go to the listing broker/listing agent directly. No more buying buyer leads from somebody else’s listing — THE key complaint about ZTR.

Instead, leads would be sent to the listing broker/agent, and if not responded to in a timely fashion (by whatever rules), then it would be referred out on the relocation-type of model. This is exactly what happens today with programs like LeadRouter and LeadStreet, with nary a peep of complaint from anybody. After all, if you the listing agent failed to respond to a consumer inquiry, and that got routed to someone else… hard to complain, no?

Realogy Still Won’t Do It… But…

Even with all of the above, I still don’t think Realogy would make a major acquisition like this. So why did we bother chatting about it?

Because even though Realogy the company might not do it, I can easily see a consortium of Realogy-types doing it.

Orbitz was the airline industry’s response to the rise of online travel agencies such as Expedia and Travelocity, as well as a solution to lower airline distribution costs. Continental Airlines, Delta Air Lines, Northwest Airlines, and United Airlines, subsequently joined by American Airlines, invested a combined $145 million to start the project in November 1999.

While there was serious scrutiny by antitrust regulators, Orbitz ultimately passed the test and was not declared as a cartel. I see no reason to think that a real estate version would somehow put Zillow and Trulia and Realtor.com out of business, so… I think that with intelligent lawyers and managers, REOrbitz would also pass muster.

(Interestingly enough, in 2004, Orbitz was acquired by one Cendant Corporation. Yeah, that would be the same Cendant Corporation that Realogy came out of. Draw whatever conclusion you wish.)

Imagine a consortium of brokers, led by Realogy and Berkshire Hathaway HomeServices, and joined by the major big-time guys in The Realty Alliance and LeadingRE (who count sophisticated, well-capitalized companies like Long & Foster, Howard Hanna, Weichert, etc. etc.), with investment/contribution by RE/MAX and Keller Williams… with some of the big Wall Street money connections (see, e.g., Apollo Group and a certain Mr. Buffet)…

Is the acquisition of a major portal still unthinkable?

Maybe.

My own guess is that none of the Big Three is for sale. Plus, they’re all public companies with all of the hassle that brings. I don’t really see it.

The one I can and do see is Redfin.

According to this report from NAR, dated August 2013, Redfin was the #8 website in the Real Estate category with 2.1m monthly uniques. Redfin also has the #4 mobile app for real estate in both iOS and Android, which is increasingly critical.

That would be the same Redfin that just raised $50m from Tiger Global Management and T.Rowe Price. The total investment after the $50m is about $97m total. The Consortium I imagined above could easily pay cash to the VC’s and to Tiger and T.Rowe Price to buy Redfin, lock, stock and barrel. Say 30% premium, or $130m. Hard to imagine the VC’s would turn that down.

Plus, if Glenn Kelman really wants to deliver end-to-end customer value, what better way than to be the online front-end to the most powerful brokerages with the biggest footprints in the industry? Glenn wrote the following about the funding:

We argue and argue in real estate over what really matters to customers, technology or service. But people want both: listing recommendations based on your browsing history and your agent’s insights about what you really like or an open house staffed by someone who can sell your home but also a digital marketing campaign to get the right buyers to your door.

Redfin was the #8 website while only being in 22 markets around the country. What could it be if it were in every market in the country, as the wholly-owned subsidiary of a consortium of brokerages, all of whom are participants in the 800+ MLSs in the United States?

Yeah. Can you see it?

None of this may happen, of course. But I’m not writing to say it will happen. I am writing to point out the logic of such a thing. It simply makes sense.

Managing Partner of 7DS Associates, and the grand poobah of this here blog. Once called "a revolutionary in a really nice suit", people often wonder what I do for a living because I have the temerity to not talk about my clients and my work for clients. Suffice to say that I do strategy work for some of the largest organizations and companies in real estate, as well as some of the smallest startups and agent teams, but usually only on projects that interest me with big implications for reforming this wonderful, crazy, lovable yet frustrating real estate industry of ours.